The fiscal response to COVID-19 is increasing by the day. Several countries have now announced multiple packages after it became apparent that the initial amounts were inadequate given the size of the shock. Many central banks have also acted to ensure additional liquidity is available to the banking sector and some are now directly buying corporate debt. But despite several pledges to do ‘whatever it takes’ to support the economy during the novel coronavirus outbreak, the effective fiscal stimulus currently in place is not as big as the headline numbers suggest.
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The fiscal response to COVID-19 is increasing by the day. Several countries have now announced multiple packages after it became apparent that the initial amounts were inadequate given the size of the shock. Many central banks have also acted to ensure additional liquidity is available to the banking sector and some are now directly buying corporate debt. But despite several pledges to do ‘whatever it takes’ to support the economy during the novel coronavirus outbreak, the effective fiscal stimulus currently in place is not as big as the headline numbers suggest.
Loan Guarantees are Not Budgetary Spending
The main reason fiscal support is smaller than the headline figures suggest is that a large chunk of the promised amounts do not constitute increased government spending. Some of the new measures are simply money reallocated from elsewhere, large amounts are contingent on banks taking on credit risk, and to the extent this is partly government guaranteed would eventually show up in debt rather than new spending, some is in the form of deferred rather than cancelled tax payments (although the exact timing matters), and some of the headline amounts are only effective next year and beyond. In addition, capital spending in areas such as infrastructure is largely impossible in the current environment even if it was intended to start immediately. And even the amounts that are current spending are contingent on being disbursed quick enough.
Most of what has been seen so far are measures to help businesses via tax holidays, direct funding to companies affected, funding to cover sick pay or childcare cover and, of course, increased healthcare spending. While undoubtedly targeted, as opposed to any helicopter money, a broader fiscal response via tax cuts, whether VAT, income tax (excluding the highest earners) or corporate taxes, could provide a quick and much-needed boost to demand. As such, the true fiscal stimulus in the form of this year’s increase in cyclically adjusted primary deficits is not simply the sum of the announced measures.
Significant New Stimulus Looks Set to Come
For the major economies (Table 1), the fiscal measures agreed so far are generally less than 1.5% of GDP and therefore timid given the scale of the crisis. But more looks to be in the pipeline. A US bill to inject as much as $1trn (around 5% of GDP) with $500bn in direct payments (to be disbursed in the coming months) is now in the Senate. Although the details of the package could change, and parts such as loan guarantees will not represent new budgetary spending, this is still a very sizeable package. The Japanese prime minister has talked of a much bigger package coming in April, and the UK’s new chancellor is also set to announce a third massive package as the British economy rapidly grinds to a halt.
Moreover, our list is not comprehensive. For example, it does not record the Netherlands’ or New Zealand’s announcement of significant stimulus packages earlier this week.
What about Germany? Finance Minister Olaf Scholz said that the loan guarantees were the ‘bazooka’, leaving little hope for a near-term turnaround in fiscal conservatism.
Table 1: Fiscal Measures Announced (as of 18th March 2020)
Source: National Sources, FT, Reuters
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